When was accrued vacation pay included in surplus and undivided profits rather than treated as a fixed liability for Louisiana franchise tax?

Plain-English summary

A pooled vacation-pay estimate that employees could lose was not a definitely fixed liability, so it was included in surplus and undivided profits for franchise tax.

By contrast, employee-specific accruals guaranteed to be paid in addition to regular pay could be indebtedness rather than surplus, with La. R.S. 47:603 then determining how much entered taxable capital.

Forfeitable pooled accrual

The common arrangement in the ruling estimated vacation pay from average employee experience and varying policies. Employees lost unused vacation and received no payout when they resigned.

The company recalculated the account annually for headcount, experience, and salary changes. It did not track individual employees or debit and credit the account as each person earned and used vacation.

Because an employee could lose the benefit, the liability was not definitely fixed.

Guaranteed employee-level accrual

The ruling described a different result when vacation was tracked for each employee, updated as the employee earned and used time, and certain to be paid in addition to regular pay if not taken.

That liability could be indebtedness. The separate borrowed-capital rules then controlled whether and how it entered the franchise-tax base.

Common questions

Q: Was every vacation accrual included in surplus?

A: No. The result depended on forfeiture risk, payment certainty, and employee-level accounting.

Q: Did a fixed vacation liability automatically stay out of taxable capital?

A: No. If it was indebtedness, La. R.S. 47:603 still had to be applied.

Citations and references

• La. R.S. 47:605(A) — surplus, undivided profits, and fixed-liability rule
• La. R.S. 47:603 — indebtedness and taxable capital
• Kieso and Weygandt, Intermediate Accounting, 635-637 (8th ed.)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 02-006

Original ruling text

RPage 1 of 2Revenue Revenue RevenueRRRRevenue Information Bulletin No 01-xxxx
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Revenue Ruling
No. 02- 006
May 17, 2002
Corporation Franchise Tax
Accrued Vacation Pay
Purpose: The purpose of this Revenue Ruling is to determine whether accrued vacation pay
should be included in the computation of surplus and undivided profits for franchise tax
purposes.
Analysis/Discussion: La. Rev. Stat. Ann. ⁄ 47:605(A)(West 2001), provides that in
computing surplus and undivided profits there shall be included all reserves other than those for
definitely fixed liabilities . . . .
According to Kieso and Weygandt, Intermediate Accounting, 635-637 (8th ed.), an employer is
required to accrue a liability for employees compensation for future absences if all of the
following conditions are met: (1) the employer s obligation relating to employees rights to
receive compensation for future absences is attributable to employees services already rendered;
(2) the obligation relates to rights that vest or accumulate; (3) payment of the compensation is
probable; and, (4) the amount can be reasonably estimated.
If an employee is at risk of losing his or her accrued vacation pay for any reason, the accrued
vacation pay cannot be thought of as a definitely fixed liability.
In the situation addressed by this Revenue Ruling, which is the most common scenario, an
estimated vacation pay accrual is made at the end of the year based upon the amount of average
employee experience with the company and the various vacation policies for different types of
employees. If during the subsequent year, an employee doesn t take the vacation pay that has
been earned, such accrued vacation pay is lost. If an employee resigns, such employee is not
paid for the vacation time they have earned.
The vacation pay accrual account is evaluated at the end of each year based upon changes in the
number of employees, variations in the experience level of the employees, and increases or
decreases in the salary level of the employees. The account is not maintained in a manner which
details specific employees. As such, it is neither debited nor credited as employees earn and use
vacation pay.
Conclusion: Due to the risk of loss in the situation addressed by this Revenue Ruling, accrued
vacation pay cannot be thought of as a definitely fixed liability. Therefore, such accrued
vacation pay should properly be included in the computation of surplus and undivided profits for
franchise tax purposes. However, if accrued vacation pay is accounted for by employee, debited
and credited as each employee uses and earns vacation and an employee is certain to be
compensated for the accrued vacation pay in addition to the employee s regular pay when the
employee fails to take an earned vacation, such accrued vacation pay should properly be
considered a definitely fixed liability and therefore indebtedness. If the accrued vacation pay is

Revenue Ruling No. 02-006
Page 2 of 2

indebtedness, then the provisions of La. Rev. Stat. Ann. ⁄ 47:603 (West 2001) must be employed
to determine to what extent it is included in taxable capital.
Cynthia Bridges
Secretary
By:

William (Mac) E. Little
Attorney
Policy Services Division

A Revenue Ruling is issued under the authority of LAC 61III.101 (C ). A Revenue Ruling is written to provide
guidance to the public and to Department of Revenue employees. It is a written statement issued to apply principles
of law to a specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on
the public. It is a statement of the department’s position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.